Bankruptcy Provision Could Hinder Housing Stimulus Package

As we reported earlier this week, the Senate will likely take up a new economic stimulus package aimed at curbing the current housing crisis in many parts of the country. However, as Reuters reports today, the package could face strong opposition due to a bankruptcy provision within the legislation.

The bill (Foreclosure Prevention Act of 2008 – S. 2636) contains a provision that would allow bankruptcy judges to modify housing loans and mortgage contracts. This provision is already receiving criticism from Republican members of the Senate as well as companies in the mortgage industry.

Reuters quotes a letter sent to Majority Leader Reid (D-NV) and Minority Leader McConnell (R-KY) by a group of lobbyists representing the banking industry as saying: “This provision will have the exact opposite effect intended by increasing the cost of mortgages for all borrowers in the form of higher interest rates or down payments, or both.”

The letter was also supported by representatives from the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Bank of America Corporation, Citigroup, Countrywide Financial Corporation and JPMorgan Chase among others.

It will be interesting to watch and see if this provision is modified or withdrawn in the face of some mounting opposition that could, if the provision is kept in the package, doom the bill.

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